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Social Media ROI : Sink or Swim

Altimeter Group recently revealed that, for an overwhelming proportion, corporate social media strategists report to Marketing and Corporate communications departments. In the same report, it was confirmed that the main concern of the corporate social strategist for 2011 is to create ROI measurements.

The Marketing profession has always been challenged to show ROI and profitability to the business. Marketing activities certainly impact a business value but traditionally in an intangible fashion such as brand equity, customer satisfaction [1]; Such initiatives work towards increasing brand awareness and measure brand recall and recognition. In social media, metrics such as brand mentions, inbound links and share of voice would be measured. These programs are not typically tied to actual sales but can give the overall health of a firm and the state of the relationship between a brand and its customers.

In this particular marketing context, being asked to justify the ROI, in term of actual cash value may be a nonsense but also shows the utter confusion around the term ROI and social media is no exception to the rule, being largely integrated to marketing function.

What is ROI?

In today’s economic situation, bottom line is what matters to business and corporations. Marketing activities spending represent over a trillion dollars a year. Social media has added a new layer of challenges for marketers who have to provide to analytical and financially-focused executives the value of their programs. If you want your project approved, you’d better be prepared to prove your point quantitatively. We’re now entering an era where Marketing has to become accountable for its decision and justify its profitability to the bottom line [1]. ROI, therefore, is one of the most talked about concepts and also, one of the most misunderstood.

ROI is a financial term, more precisely it is an accounting measure that helps predict costs and return of a specific investment. The input and outcome are always in cash. The *I* in ROI means dollars, euros, yen, or rupees. It doesn’t mean influence or engagement, as many social media specialists indicate. ROI is primarily used to select projects based on future financial performance; ROI is an estimate, it is not an exact science and is based on assumptions and known variables such as time and magnitude.

Depending on whom you talk to – executives or stakeholders – ROI bares a different meaning. This is what they are really asking

– How much money will I get in return?

– What do I get out of it in terms of benefits for my business/product/brand?

– What is it going to cost me?

If in any of the above cases, you have to justify cash spending, only the first question is about ROI, the way most executives understand it. Before even attempting to answer the questions and give a relevant and intelligible response, it would be imperative to know where social media fits in the organisation and what the strategic objectives of your organization. Then what are the specific objectives for your social media program including generating revenues like Dell with their @Delloutlet, increasing brand awareness or like Starbucks, building a long-term relationship with your customers. From there, you can determine if Social media is viewed as a cost center or a revenue center.

Since ROI is and stays a financial accounting concept, for an organisation, your social media program will either fall into a cost center or a revenue center – Some more complicated structures also exist, such as profit and investment center – but for the sake of simplifying, I will not go into it :

* a cost center traditionally spends money. It is a department, business unit or an initiative that will bring very little revenue, if any. The outcome of a cost center doesn’t have a direct impact on revenue. Depending on the organization, cost centers are marketing, PR, HR, R&D and even IT. Those Lines of business contribute to the overall production of services and products and therefore, play a crucial role in the overall customer experience but don’t bring in direct revenue. Performance measurement is not ROI as those managers and staff are not directly responsible for producing revenue. Instead, a more relevant measure is how well are those *costs* spent compared to a budget. As an example, HR would be evaluated on specific KPI such as number of recruits, employee retention, training sessions that increase communication and work efficiency and number of issues resolved and how fast. Those metrics cannot be directly traced back to bottom line but have a huge impact on company’s health and performance.

* a revenue center makes money. Of course, it will also spend money but by and large, it brings in hard dollar figures that directly impact the bottom line. Typical revenue centers are Sales department and some marketing department when running short-term sales promotions, for example.

The truth about ROI:

The truth about social media ROI.
Source: Google

The truth is social media can have a direct or indirect impact on bottom line and it is crucial to identify where social media programs fall in order to determine specific objectives and define the relevant and most indicative performance indicators.

Trying to answer in bulk about what the ROI of social media is can essentially be vague and unreasonable. Social media is nascent; no solid and meaningful benchmarks have been determined to evaluate any returns. ROI is a process. It is not something that will be easily calculated.

ROI may not be the best method of evaluating the viability of social media programs within the company; time, magnitude, cost, alignment with strategic objectives and other qualitative benefits might be better selection criteria.

In matter of social media, ROI is not the first question to ask. Considering its unique properties, social media should be strategically implemented internally to facilitate and enable business performance with specific metrics, depending towards which objectives a social media program is developed. Social can strongly impact business performance depending on how it is integrated and in relation to the defined objectives.

With social media, it is the first time in history that mainstream adopts, uses and masters technological tools faster and better than corporations and brands. It is a shift that may also require a comprehension in the corporate culture of how and where social media can definitely improve bottom line of a firm.

PS: I also recommend @thebrandbuilder a.k.a Olivier Blanchard’s excellent presentation on the basics of social media ROI. It details the essential steps towards building and measuring social media efforts.

2 thoughts on “Social Media ROI : Sink or Swim”

Thanks for this post, Karima. What do you think of the fact that more SM reports into marketing than PR? I’ve found that CMOs tend to be more comfortable with the explicit connection to sales and metrics that SM offers, but that people schooled in community relations and media relations tend to be better at the conversational aspects.